Hostname: page-component-745bb68f8f-cphqk Total loading time: 0 Render date: 2025-01-07T10:29:42.507Z Has data issue: false hasContentIssue false
  • English
  • Français

Initial Public Offerings in Hot and Cold Markets

Published online by Cambridge University Press:  06 April 2009

Jean Helwege  and
Nellie Liang
Jean Helwege
Affiliation:
[email protected], Department of Finance, University of Arizona, Tucson, AZ 85721;
Nellie Liang
Affiliation:
[email protected], Board of Governors of the Federal Reserve System, Division of Research and Statistics, Capital Markets Section, Mail Stop 89, Washington, DC 20551.
Get access Rights & Permissions [Opens in a new window]

Abstract

The literature offers many explanations for why the IPO market cycles from hot to cold. These include theories in which hot markets represent clusters of IPOs in a new industry, and signaling models that predict that hot markets draw in better quality firms. Others suggest hot market IPOs' stock returns reflect their poor quality. We compare IPOs over cycles during 1975–2000 and find that hot and cold IPO markets do not differ so much in the characteristics of the firms that go public as in the quantity of firms that go public. Both hot and cold IPOs are largely concentrated in the same narrow set of industries and they have few distinctions in profits, age, or growth potential. Our results suggest that hot markets are not driven primarily by changes in adverse selection costs, managerial opportunism, or technological innovations, but more likely reflect greater investor optimism.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 39 , Issue 3 , September 2004 , pp. 541 - 569
Copyright
Copyright © School of Business Administration, University of Washington 2004

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Allen, F., and Faulhaber, G.. “Signalling by Underpricing in the IPO Market.” Journal of Financial Economics, 23 (1989), 303–323.Google Scholar
Anderson, R., and Lee, S.. “Ownership Studies: The Data Source Does Matter.” Journal of Financial and Quantitative Analysis, 32 (1997), 311–329.Google Scholar
Bayless, M., and Chaplinsky, S.. “Is There a ‘Window of Opportunity’ for Seasoned Equity Issuance?” Journal of Finance, 51 (1996), 253–278.Google Scholar
Benninga, S.; Helmantel, M.; and Sarig, O.. “The Timing of Initial Public Offerings.” Journal of Financial Economics (forthcoming 2004).Google Scholar
Benveniste, L.; Busaba, W.; and Wilhelm, W.. “Information Externalities and the Role of Underwriters in Primary Equity Markets.” Journal of Financial Intermediation, 11 (2002), 61–86.CrossRefGoogle Scholar
Brau, J.; Francis, B.; and Kohers, N.. “The Choice of IPO Versus Takeover: Empirical Evidence.” Journal of Business, 76 (2003), 583–612.Google Scholar
Brav, A.; Geczy, C.; and Gompers, P.. “Is the Abnormal Return following Equity Issuance Anomalous?” Journal of Financial Economics, 56 (2000), 209–249.Google Scholar
Brav, A., and Gompers, P.. “Myth or Reality? The Long-Run Underperformance of Initial Public Offerings: Evidence from Venture and Non-Venture-Capital-Backed Companies.” Journal of Finance, 52 (1997), 1791–1821.Google Scholar
Busaba, W.; Benveniste, L.; and Guo, R.. “The Option to Withdraw IPOs during the Premarket: Empirical Analysis.” Journal of Financial Economics, 60 (2001), 73–102.Google Scholar
Chemmanur, T., and Fulghieri, P.. “A Theory of the Going-Public Decision.” Review of Financial Studies, 12 (1999), 249–279.Google Scholar
Choe, H.; Masulis, R.; and Nanda, V.. “Common Stock Offerings across the Business Cycle.” Journal of Empirical Finance, 1 (1993), 1–29.Google Scholar
Fenn, G.; Liang, N.; and Prowse, S.. “The Role of Angel Investors in Financing High-Tech Start-ups.” Unpubl. Manuscript, Federal Reserve Board (1998).Google Scholar
Field, L “Is the Institutional Ownership of Initial Public Offerings Related to the Long-Run Performance of These Firms?” Unpubl. Manuscript, Penn. State Univ. (1997).Google Scholar
Field, L., and Karpoff, J.. “Takeover Defenses of IPO Firms.” Journal of Finance, 57 (2002), 1857–1889.Google Scholar
Field, L., and Mulherin, H.. “Newly Public Firms as Acquisition Targets: A Comparison with Established Target Firms.” Unpubl. Manuscript, Penn. State Univ. (1999).Google Scholar
Fischer, C. “Why Do Companies Go Public? Empirical Evidence from Germany's Neuer Markt.” Unpubl. Manuscript, Univ. of Munich (2000).CrossRefGoogle Scholar
Grinblatt, M., and Hwang, C.. “Signalling and the Pricing of New Issues.” Journal of Finance, 44 (1989), 393–420.Google Scholar
Helwege, J., and Packer, F.. “Private Matters.” Unpubl. Manuscript, Univ. of Arizona, BIS (2003).Google Scholar
U., Hoffman-Burchardi “Clustering of Initial Public Offerings, Information Revelation and Underpricing.” European Economic Review, 45 (2001), 353–383.Google Scholar
Ibbotson, R., and Jaffe, J.. “Hot Issue Markets.” Journal of Finance, 30 (1975), 1027–1042.Google Scholar
Ibbotson, R.; Sindelar, J.; and Ritter, J.. “The Market's Problem with the Pricing of Initial Public Offerings.” Journal of Applied Corporate Finance, 7 (1994), 66–74.CrossRefGoogle Scholar
Jain, B., and Kini, O.. “The Post-Issue Operating Performance of IPO Firms.” Journal of Finance, 49 (1994), 1699–1726.Google Scholar
James, K., and Kieschnick, R.. “An Analysis of Fluctuations in the U.S. IPO Market.” Unpubl. Manuscript, SEC and FCC (1997).Google Scholar
Jegadeesh, N.; Weinstein, M.; and Welch, I.. “An Empirical Investigation of IPO Returns and Subsequent Equity Offerings.” Journal of Financial Economics, 34 (1993), 153–175.Google Scholar
Jones, J. “Earnings Management during Import Relief Investigations.” Journal of Accounting Research, 29 (1991), 193–228.Google Scholar
Kahle, K., and Walkling, R.. “The Impact of Industry Classifications on Financial Research.” Journal of Financial and Quantitative Analysis, 31 (1996), 309–339.Google Scholar
Korajczyk, R.; Lucas, D.; and McDonald, R.. “The Effect of Information Releases on the Pricing and Timing of Security Issues.” Review of Financial Studies, 4 (1991), 685–708.Google Scholar
Krigman, L.; Shaw, W.; and Womack, K.. “The Persistence of IPO Mispricing and the Predictive Power of Flipping.” Journal of Finance, 54 (1999), 1015–1044.CrossRefGoogle Scholar
Lerner, J. “Venture Capitalists and the Decision to Go Public.” Journal of Financial Economics, 35 (1994), 293–316.Google Scholar
Ljungqvist, A.; Nanda, V.; and Singh, R.. “Hot Markets, Investor Sentiment, and IPO Pricing.” Journal of Business (forthcoming).Google Scholar
Loughran, T., and Ritter, J..“The New Issues Puzzle.” Journal of Finance, 50 (1995), 23–51.Google Scholar
Loughran, T., and Ritter, J.. “Why Don't Issuers Get Upset About Leaving Money on the Table in IPOs?” Review of Financial Studies, 15 (2002), 413–443.Google Scholar
Loughran, T.; Ritter, J.; and Rydqvist, K.. “Initial Public Offerings: International Insights.” Pacific-Basin Finance Journal, 2 (1994), 165–199.Google Scholar
Lowry, M. “Why does IPO Volume Fluctuate So Much?” Journal of Financial Economics, 67 (2003), 3–40.Google Scholar
Lowry, M., and Schwert, G.. “IPO Market Cycles: Bubbles or Sequential Learning?” Journal of Finance, 57 (2002), 1171–1200.Google Scholar
Lucas, D., and McDonald, R.. “Equity Issues and Stock Price Dynamics.” Journal of Finance, 45 (1990), 1019–1043.Google Scholar
Lyon, J.; Barber, B.; and Tsai, C.. “Improved Methods for Tests of Long-Run Abnormal Stock Returns.” Journal of Finance, 54 (1999), 165–201.CrossRefGoogle Scholar
Maksimovic, V., and Pichler, P.. “Technological Innovation and Initial Public Offerings.” Review of Financial Studies, 14 (2001), 459–494.CrossRefGoogle Scholar
Mello, A., and Parsons, J.. “Going Public and the Ownership Structure of the Firm.” Journal of Financial Economics, 49 (1998), 79–109.Google Scholar
Michaely, R., and Shaw, W.. “The Pricing of Initial Public Offerings: Tests of Adverse-Selection and Signaling Theories.” Review of Financial Studies, 7 (1994), 279–319.CrossRefGoogle Scholar
Mikkelson, W.; Partch, M.; and Shah, K.. “Ownership and Operating Performance of Companies that Go Public.” Journal of Financial Economics, 44 (1997), 281–307.Google Scholar
Pagano, M.; Panetta, F.; and Zingales, L.. “Why Do Companies Go Public? An Empirical Analysis.” Journal of Finance, 53 (1998), 27–64.Google Scholar
Pagano, M., and Roell, A.. “The Choice of Stock Ownership Structure: Agency Costs, Monitoring and the Decision to Go Public.” Quarterly Journal of Economics, 113 (1998), 187–225.CrossRefGoogle Scholar
Pastor, L., and Veronesi, P.. “Stock Prices and IPO Waves.” Journal of Finance (forthcoming).Google Scholar
Rajan, R., and Servaes, H.. “Analyst Following of Initial Public Offerings.” Journal of Finance, 52 (1997), 507–529.Google Scholar
Ritter, J. “The ‘Hot Issue” Market of 1980.” Journal of Business, 57 (1984), 215–240.Google Scholar
Ritter, J. “The Long-Run Performance of Initial Public Offerings.” Journal of Finance, 46 (1991), 3–27.Google Scholar
Ritter, J., and Welch, I.. “A Review of IPO Activity, Pricing and Allocations.” Journal of Finance, 57 (2002), 1795–1828.Google Scholar
Schultz, P. “The Timing of Initial Public Offerings.” Unpubl. Manuscript, Univ. of Notre Dame (2000).Google Scholar
Schultz, P., and Zaman, M.. “Do the Individuals Closest to Internet Firms Believe They are Overvalued?” Journal of Financial Economics, 59 (2001), 347–381.Google Scholar
Spiess, K., and Pettway, R.. “The IPO and First Seasoned Equity Sale: Issue Proceeds, Owner/Managers’ Wealth, and the Underpricing Signal.” Journal of Banking and Finance, 21 (1997), 967–988.Google Scholar
Stoughton, N.; Wong, K.; and Zechner, J.. “IPOs and Product Quality.” Journal of Business, 74 (2001), 375–408.Google Scholar
Subrahmanyam, A., and Titman, S.. “The Going-Public Decision and the Development of Financial Markets.” Journal of Finance, 54 (1999), 1045–1082.Google Scholar
Teoh, S.; Welch, I.; and Wong, T.. “Earnings Management and the Long-Run Market Performance of Initial Public Offerings.” Journal of Finance, 53 (1998), 1935–1974.Google Scholar
Welch, I. “Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings.” Journal of Finance, 44 (1989), 421–449.Google Scholar
Zingales, L. “Inside Ownership and the Decision to Go Public.” Review of Economic Studies, 62 (1995), 425–448.Google Scholar